Conviction was lacking in the European session and risk appetite was mixed. Political uncertainty in North Korea was partly offset by the prospect of potentially euro-positive headlines later today from the Eurogroup conference call. FX markets generally traded in narrow ranges, however. North Korean media announced that leader Kim Jong-il passed away over the weekend, sending USDJPY briefly higher. Officials from Japan and the Republic of Korea stressed that both countries remain on their guard, although the yen recovered when fears of an immediate military reaction receded. Although Kim Jong-il had already picked his third son Kim Jong-un as the next head of state, a smooth leadership transition is by no means guaranteed, and as such we remain cautious on the yen in the immediate future given the headline risk. The eurogroup (17 Finance Ministers) will hold a conference call at 3:30pm CET (it is expected to end by early evening) where they seem likely to agree on the €200bn for the IMF communicated at the 9 Dec EU Summit. Late on Friday, Fitch put the ratings of several Eurozone countries on review and lowered the outlook on France to ‘negative’ from ‘stable’. We note that S&P already has the French rating on review and, as such, Fitch’s move against France does not break new ground. However, Fitch also warned that a comprehensive solution for the Eurozone debt crisis is ‘beyond reach’, a comment which may reinforce market concerns that an elegant solution to the crisis may not be politically possible. Belgium was also downgraded two notches to Aa3 by Moody’s, having been on review for two months. Although the market is better prepared for further ratings action, the risk of more bad news on the ratings front before year-end is likely to keep investors on edge. Ahead this week, the Riksbank is scheduled to announce its policy decision, while GDP figures are due in several countries.
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UBS Investment Bank